The end of “commodity” grain?

Editor's note: H.D. (Harry) Cleberg, president, Farmland Industries, Inc., Kansas City, Missouri, U.S., recently described his vision of the future of agriculture and the grain industry in an address before the annual joint meeting of the National Grain Trade Council and the North American Export Grain Association at Whitefish, Montana, U.S. This article is based on his comments.

The way we sell grain is changing. Our relationship with our customers is changing. And the nature of the products we sell, even the nature of markets, is changing.

Today, most of what we sell are commodities. But in the very near future, if you still think about grain as a commodity, you are going to be in for a heck of a ride in the next 10 to 20 years.

Today's grain industry is being shaped by four significant and compelling forces:

 biotechnology

 government's departure from grain marketing

 the strategies of the agricultural support structure of the past and

 the concentration and market power in agriculture.

These four forces challenge each of us.

More Genetic Modification

Biotechnology has been around for a long time, but until it was proven that the scientist could deliver a gene-altered product that actually work-ed, none of us took much notice. Today, we have taken notice.

According to a recent issue of the KiplingerAgricultural Letter, half of U.S. maize and soybeans will have “character-specific traits”  or biotechnology-altered traits  in four years. New projections show about 5.6 million hectares, or 20% of all U.S. soybeans planted this year, are genetically engineered. And 3.6 million maize hectares, or 11%, are genetically engineered.

These numbers will get bigger in 2001, when Kiplinger estimates that 54% of all U.S. soybean plantings and 51% of the maize area will be genetically modified.

There are two kinds of biotechnology products: those that lower the producer's cost of production and raise his yield, and those products that are intended to raise the value of the grain produced.

The only thing limiting the expansion of those products that lower costs and improve productivity is the availability of the seed. I am convinced that if seed companies had enough seed for the U.S. to plant 26 million hectares of Round-Up Ready soybeans, they would sell every bag.

But those products that have the ability to improve the consumptive characteristics, like high oil content maize, are having a much more difficult time in the marketplace. Our grain customers want products that will lower their costs, improve their productivity or enable them to build a better product. So why haven't these value-added types of products swept the market?

I think it is pretty simple. These customers do not trust the grain industry.

You see, for decades, our grain industry has been geared to produce and deliver a quantity of grain that met minimum standards. Each of us has bought grain of various qualities and grades and blended it down to the minimum possible standard. In a world where we trade only commodities, this is a sound business practice.

When we engage in this practice, why should we expect our customers to trust us? Today's consumers want products that are dependable, consistent and predictable. When we deliver dependable, consistent and predictable products and have the pride to put our name on them, consumers will bury us in money.

Consumers want a loaf of bread, a bagel or a hot dog that they know will taste as good as, or better than, the last one they ate. To satisfy this demand, we all have to deliver products that meet those standards.

In the future, more and more of these standards will be met through the application of altered genetics. The possibilities of biotech are endless. Imagine producing marbled beef that melts in your mouth, but contains no cholesterol. Without a doubt, the grain of tomorrow will be customized, tailored to fit an individual buyer's needs.

Infrastructure and Consolidation

Is the U.S. rail system geared up to handle small quantities of identity-preserved grain? Are our elevators equipped to manage the storage and logistics of 10, 15 or even 20 different types of maize? And finally, are our markets, like the Chicago Board of Trade, ready to deal with the new complex challenge of price discovery?

Frankly, I don't see much evidence that any part of the system is ready. In fact, if you look at the rail carriers, they are building strategies that worked great for the past two decades when the export of raw unprocessed grain was the main attraction.

More and more of our grain is being processed right here in North America. The international market for bulk commodities is alive and well, but the export market for grain is essentially flat.

However, the export market for meat, poultry and processed grain products is growing tremendously. This means that more and more of the grain we produce is going to need to be in position to serve the domestic market, not the export market of the past.

The commodity mentality of the past must disappear. Everyone here has customers with very specific and unique requirements. If we intend to stay in business, we need to serve those needs.

It is clear the rail carriers' strategy is to move as much volume as possible with the least amount of effort. Unit and shuttle trains, which on-load grain at terminals and transport it directly to export terminals, are an example.

Grain shippers are aware that rail carriers' strategy is not supportive of inland processing plants. For a while, this strategy may serve the railroads well.

But longer term, this strategy will be limiting. It would be far more productive for the rail carrier to recognize that a custom seed, grown to produce a custom product for a specific market, may require a transportation service that satisfies the customer. Both parties must recognize that the old commodity nature of grain will change rapidly as we move into the future.

Today, the battle in the grain industry is being fought for grain origination. Frankly, I am not surprised by this rapidly growing trend. It validates the reason cooperatives exists, and that is to provide a balance in the marketplace for farm and ranch families.

In the early days of Farmland, the function of the cooperative seemed clear. Farmers got together to buy goods in quantity and sell grain and livestock in big lots to avoid the big margins the private trade was extracting.

After World War II, farmers saw private companies bidding against each other and, through competition, ensuring fair selling prices for their grain. In the 1960s, 1970s and 1980s, cooperatives seemed less relevant as a protection against low bid prices. Today, conditions similar to those that resulted in the early creation of cooperatives appear to be alive and well once again.

Farmland is in the grain business today. We will be in the grain business tomorrow. And we will continue to expand our grain business. We will do this through partners and alliances. The alliances we form today have a strategy and a direction. Our relationships are fair and flexible for all our cooperative partners.

Ninety-five percent of the world's consumers live outside the United States. Of U.S. agricultural products, almost 30% ends up in the export market. The expansion that has occurred in (U.S.) grain markets has been because markets all over the world have opened up.

But in parts of the world, the markets have been too slow to open up. It is unfortunate that these countries are using artificial barriers to prevent free and open competitive trade. The “law” of the General Agreement on Tariffs and Trade is being followed, but clearly the spirit of the agreement is not being lived up to.

It is no secret that Farmland is experienced in these matters. We have had our beef kept out of Europe for too long because of political, fear-based barriers. We have had wheat kept out of China and South America because of some non-science-based fear.

As long as artificial (non-tariff) trade barriers exist, we must persist in our efforts to open markets. These barriers are dangerous. They destroy the spirit of free trade, open markets and open competition. And they threaten the very thing that has lifted markets all over the world, which is growing and stronger economies.

The North American Free Trade Agreement and GATT have moved us closer to free trade. NAFTA has worked. GATT is working, and it will work better after some parts are fixed in the next round.

Even if we successfully manage technology and biotechnology, information technologies and industry relationships in the way that we, as individual organizations think best … even if we do succeed in producing a grain product that will satisfy the customers, it won't do any good if we can't get that product to the buyer's port.

Until the world adopts consistent and fair standards and rules on food and fiber safety, non-competitive corners of the globe will slip back to the old ways of closed markets, restricted trade and shrinking economies. A free marketplace would open better business opportunities for North America and the rest of the world.

In the grain business, the old signposts are disappearing. We must make new ones. We must respond to change.

We must grow the specific grain that customers want; we must devise a transportation system to get it there intact that is fair to all; and we must remove trade barriers that prevent us from getting our grain to more distant destinations.